Yesterday’s reported increase in Australian life expectancy, while good news overall, is likely to pose some acute challenges for retirement policy. According to the latest Australian Bureau of Statistics (ABS) life expectancy estimates, a 65 year old male can expect to live a further 19 years and females a further 22 years.
Yet, according to the latest RaboDirect annual Savings and Debt Barometer, 29% of baby boomers expect to have a mortgage when they retire, with around half of all baby boomers expecting to run out of money during their retirement, forcing them onto the aged pension.
It seems the strategy of choice for baby boomers retiring with a mortgage is to: 1) use their superannuation to pay off their home loan; or 2) downsize their family home. Indeed, the RaboDirect survey found that roughly one quarter of boomers are planning the first option, whereas around one-third plan to downsize to free-up funds.
The first strategy – using super to pay off the mortgage – highlights some inherent flaws in Australia’s superannuation system. Specifically, that it allows an individual to retire at 60, withdraw their super tax free as a lump sum, use the money to pay-off their mortgage or to fund consumption, and then go on the aged pension from 65 years of age, with the family home then being exempt from the assets test.
In such instances, the taxpayer is left wearing the cost of superannuation concessions throughout the individual’s working life, and then again once that same individual goes on the aged pension. It is a strategy that, while making sense for the individuals concerned, compromises the integrity, fairness and sustainability of the retirement system which, after all, was supposed to relieve pressure on the aged pension and the Budget, not exacerbate it.
It also highlights the need to begin taxing superannuation lump sums, whilst at the same time encouraging retirees to withdraw their savings as a annuity (instead of the pension), as well as including the family home in the assets test.
The second strategy – downsizing the family home – risks placing significant downward pressure on the housing market. As argued many times over the past three years, the baby boomer generation comprises around 25% of Australia’s population but holds nearly half of the nation’s housing stock by value.
As they sell-up en masse in a bid to free-up funds for their retirement, it will act to depress house values, with the Bank for International Settlements estimating that Australia’s real house price growth could be reduced by around 30% in real terms in the 40 years to 2050, compared to neutral demographics.
Never before has Australia witnessed the retirement of such a large and financially influential generation. Australia’s economic and fiscal settings are not prepared for the challenges ahead, which are likely to be ongoing and persistent.
The first step in any policy response is to recognise that the challenge exists, and then to make the appropriate policy adjustments. Fundamental reform of Australia’s retirement system, aimed at improving both inter-generational fairness and system sustainability, must rank high on the Government’s priorities list.
